Why an India court ruling on a 2018 deal is rattling foreign investors

Foreign investors and private equity firms operating in India are making anxious calls to advisers and lawyers after a Supreme Court ruling earlier this month strengthened the government's hand in tax disputes.

On 15 January, India's top court ruled that US investment firm Tiger Global must pay tax in India on the sale of its stake in e-commerce giant Flipkart to Walmart in 2018. The 152-page judgment overturned a 2024 Delhi high court decision that had allowed Tiger Global to claim tax relief under a decades-old India–Mauritius tax treaty.

The ruling, which could reshape how foreign investors exit their Indian investments, sets out a tougher interpretation of tax treaties. It allows authorities to deny treaty benefits if offshore investment structures are deemed to be sham entities with little commercial substance - even when investors hold valid documentation.

The judgement gives India wide powers to scrutinise any offshore corporate deal. But experts warn it could unsettle international investors and hurt business sentiment.

Some lawyers who wanted to remain unnamed told the BBC that their clients were worried that the ruling could lead to scrutiny of old transactions and share sales long thought to be settled.

"The judgment opens up unjustifiable windows for tax authorities to scrutinise any offshore corporate deal," says Ketan Dalal, managing director of Katalyst Advisors. "This can undermine policy stability and certainty, which are critical for doing business in India."

The Tiger Global case dates to 2018, when US retail giant Walmart bought Flipkart in one of the largest e-commerce deals of the time. Tiger Global, which invested through three Mauritius-based entities, sold its entire 17% stake for about $1.6bn (£1.19bn).

The transaction initially drew attention as a landmark foreign exit from India's e-commerce sector - before becoming one of the country's most closely watched tax disputes.

Tiger Global argued that its gains were shielded from Indian tax because the investment was held through entities in Mauritius, invoking a long-standing tax treaty between the two countries. It relied on tax residency certificates issued by Mauritius, which had traditionally been accepted as sufficient proof to claim treaty benefits.

Delhi had changed tax rules in 2016, making gains from the sale of Indian shares taxable even under treaties. Investments made before 1 April 2017, however, were exempted. Tiger Global said its Flipkart investments predated the change and, therefore, qualified for the exemption.

Indian tax authorities rejected the claim and argued that the Mauritian firms served as conduits and were used only to avoid taxes, with no real business purpose.

The Supreme Court has now sided with Indian officials, ruling that tax certificates alone do not guarantee treaty benefits and that the investment structure lacked real commercial substance. It held that foreign investors cannot rely on complex offshore set-ups when those entities don't carry out genuine business activities of their own.

JB Pardiwala, one of the two judges, wrote: "Taxing an income arising out of its own country is an inherent sovereign right. Any dilution of this is a threat to a nation's long-term interest."

The exact tax and penalty bill for Tiger Global depends on its profit from the deal and is not yet known. Tiger Global did not respond to the BBC's questions.

The ruling has raised concerns around future sales of investments for private equity funds or foreign direct investment routed through the island nation.

It also has wider ramifications since India and Mauritius signed a protocol in 2024 amending their tax treaty to benefit only companies with legetimate businesses and not shell companies set up to avoid tax, says Fereshte Sethna, a tax lawyer and senior partner at DMD Advocates. The protocol has yet to come into force and will apply to future deals.

India had long tried to attract foreign capital by encouraging investments from companies with structures in countries such as Mauritius, Singapore and the Netherlands, signing treaties to help investors avoid paying taxes twice.

It worked. Between 2000 and March 2025, Mauritius alone accounted for about $180bn (£133.9bn), nearly a quarter of all foreign direct investment into India, according to official figures.

But concerns over misuse of treaties to evade tax and litigations have persisted for years. The debate intensified after the Panama Papers and Paradise Papers leaks which showed how rich individuals and multinationals used tax havens to protect their wealth from higher taxes.

It prompted India to tighten tax laws from 2016. The recent Supreme Court ruling further strengthens the tax authority's hand if it can prove that companies have set up offshore entities only to avoid tax.

While tax experts say the court has applied the law as it is written, they warn it creates new uncertainty. It challenges the government's earlier promises to safeguard pre-2017 deals routed through places like Mauritius.

The core issue is the credibility of a sovereign's commitments and trust in its tax regime, Dalal says.

If the government promised protection for investments made before 2017, then this ruling could be seen as undoing that promise, says Sethna, who appeared on behalf of Vodafone in India's longest-running tax litigations in the past decade.

India's battle with the British telecom giant over a $2bn tax claim lasted years and ultimately reshaped how the country taxes cross-border transactions, even prompting a controversial retrospective tax change. Vodafone eventually won the dispute.

A lawyer currently advising some private equity sales told the BBC that after the Tiger Global ruling, all deal valuations and calculations will have to be redone in case they are scrutinised by tax authorities. Due diligence and paperwork will increase. "All pre-2017 investments they thought would not attract tax are now at high risk of scrutiny," he says, declining to be named owing to the sensitivity of his clients.

Tax advisers say the ruling has shaken confidence. Amit Maheshwari, a tax partner at AKM Global, a consulting firm with a focus on cross-border transactions, says firms advised clients based on the law of the land at the time, but now see settled positions being reopened years later. He warns this reversal creates deep uncertainty.

India has long been a top destination for investors, looking to gain from its fast-growing consumer base, but it has also faced criticism for policy shifts and drawn-out tax battles.

Analysts worry the new ruling could further slow money coming into the country as investors reassess how they invest and which routes are still safe - at a time when global trade tensions and geopolitical risks are already weakening on fund flows.